Search This Blog

Wednesday, October 21, 2015

Expansionary Monetary Policy and Housing Developer

Expansionary monetary policy means loosening of interest rates. In Malaysia, this will be the OPR, which is Overnight Policy Rate (need to check this is correct or not).

As the interest rates are lower (loosening means to lower the interest rate), borrowing cost becomes cheaper. This encourages borrowing.

The effect on a housing developer comes in 2 ways.

Effect to Housing Developer.
To cost of borrowing to the housing developer. Types of loans that a housing developer needs to have are:
1. Performance guarantee (a bond to complete the project).
2. Bridging Loan which is the cost to finance the developer's project.
3. Bankers Guarantee, for cost of hiring foreign workers.

All of these loans are charged based on base lending rate/base financing rate/base rate, which in turn rely on the OPR. Therefore, expansionary monetary policy results in cheaper cost for housing developers.

Effect on Consumer
The second component in the equation will be the effect on individual customers and housebuyers. As loans are now cheaper, this will encourage customers/housebuyers to buy new properties. Therefore, demands for housing will increase. Thus, this brings additional positive effects to a housing developer.

Prolonged Expansionary Monetary Policy
However, prolonged run of expansionary monetary policy would result in inflationary effect.
As loans get cheaper, housing price increased. The increase in housing price will then result in houses slowly becoming out of reach to most of the population. 

If a government does not control the price in property market, this will in turn result in the property market turning into a property bubble which will explode once there is an oversupply of property in the market.

When this happens, the housing developers may be forced to close down due to adverse market conditions.

Note - technically, our monetary policy is still on an expansionary mode. It still has very low interest rate as compared to say, 1998.

Note 2 - this was originally written to help my friend understand the above issue. One thing led to another, and since this is something I do cover from time to time, at least I share it out so at least there is a repository of what I have written somewhere.

No comments:

Post a Comment